My Take On The Safaricom IPO

With good reasons, I don't blog about Kenyan companies. For one, there is hardly any information about them and secondly, I don't believe in long distant investing. However, now that Safaricom's IPO has finally been announced, I think it is appropriate that I pen down a few of my thoughts especially because 35% of the offering is targeted towards foreigners.

Summary of Safaricom Profits

Year	PBT/Kshs	% change
2002	0.75 b	-
2003	2 b	166
2004	3.45 b	73
2005	5.85 b	70
2006	12.78 b	119
2007	17.79 b	39
2008	?	?

At the current IPO price of 5 shillings per share, the IPO values Safaricom at 200 billion shillings. According to the Kenyan government, the 5 shillings per share represents a 14% discount and therefore by their calculations, the company is worth at least 232 billion shillings. Going by last years earnings of 17.78 billion shillings, the company has a trailing P/E of 19. To my knowledge, there is no mention of dividends though the company paid out dividends in 2006 and 2007. While I have not seen the prospectus, my expectation is that the company will declare a dividend at the end of the current year but withhold paying dividends to its new shareholders in the coming year.

Using the last available results from Safaricom, it is difficult to accurately determine the fair value of the company. While their customer base is on the rise, the cost of calls has fallen drastically in the last two years. Compared to the previous years, 1000 shillings worth of cell phone credit lasted more than 1 week during my visit last year. Before this, I used to credit my cell phone account every 2 or so days with the same amount. And now that Safaricom is rolling out a 3G network, it's revenue base should increase though they will have to invest in the infrastructure. I expect the use of mPesa service, which enables Kenyans to send money to each other, will add more revenues though I have heard that it's popularity is limited Kenyans who have no access to the banking system (any takers?).

Mobile Telecommunications ADRs (NYSE & NASDAQ)

Company	Country	P/E	% Yield
Movil (A)	Mexico	-	0.93
Movil (L)	Mexico	19	0.62
Indosat	Indonesia	16.8	2.17
TeleSystems	Russia	16.3	2.4
DoCoMo	Japan	17.1	2.5
Partner	Israel	14.5	5.52
SK Telecom	Korea	-	0.56
Telemig	Brazil	12.67	1.61
Turkcell	Turkey	14.9	2.05
Vimpel	Russia	22.1	1
Vivo	Brazil	-	0.15
Vodafone	UK	29.8	4.6

Going by last years results and compared to other mobile phone operators around the world, Safaricom seems undervalued. I have my doubts as to whether the current fiscal year's profits will top last year's record breaking profits. During the post election turmoil, there were disruptions in the sale of airtime and they will certainly incur losses resulting from the vandalism of their properties, loss of productivity and reduced usage by their business customers.

For me this IPO will be no different from the all others. My view is that I can buy other mobile and telecom operators that are listed here in the US equity markets. My favorite Africa play is Telkom SA (TKG) which pays a 5% dividend. The company provides mobile, fixed-line and internet services in addition to directory and e-commerce services in South Africa. Through joint ventures, the company has operations in Congo, Tanzania, Lesotho and Mozambique and is poised to expand into other sub-Saharan nations. Their biggest drawback is poor customer service as is evident from the numerous of negative posts by South African bloggers.

For Kenyans in the diaspora wishing for a piece of Safcom, they will have to put up with wiring money home, waiting for the allocation and refunds plus put up with shady stock brokers who are notorious for frustrating retail investors. It baffles me why Kenyans in the US would want to hustle just to buy shares worth $150 (minimum offering). According to Bankelele, Kenyans can expect to get shares worth $250 as the IPO is going to be over-subscribed as was the case with KenGen.

In my opinion, this offering should be left for Kenyans who have got no access to other equity markets. Knowing the psychology of Kenyan during IPO's, the stock is a good buy for Kenyan residents not only because of diversification reasons but also because of the ensuing post IPO share price appreciation hype.

Recommendation; If you are a Kenyan living in the US, send your loved ones $300 so that they can buy a piece of Safcom. If not, invest in a good cell phone like the iPhone (wait for the 3G version to be launched in the summer).

Addendum; You can read my summary of Safaricom's IPO prospectus here.